Market Analysis

Investors are concerned about returns due to Big Tech's AI expenditure

Amos Simanungkalit · 01 Nov 202416.1K Views

Major technology firms, including Microsoft (NASDAQ: MSFT), Meta (NASDAQ: META), and Amazon (NASDAQ: AMZN), are significantly increasing their investments in AI data centers to meet soaring demand. However, Wall Street is eager for quicker returns on these substantial investments.

Both Microsoft and Meta reported on Wednesday that their capital expenditures are rising due to AI initiatives. Alphabet (NASDAQ: GOOGL) also indicated on Tuesday that these spending levels would remain high, while Amazon projected further increases throughout the remainder of the year and into 2025.

This surge in capital spending could jeopardize the robust profit margins of these companies, potentially causing investor anxiety over profitability.

Following these announcements, shares of Big Tech companies fell on Thursday, reflecting the challenges they face in balancing ambitious AI projects with the need to reassure investors about short-term performance. Meta's stock dropped by 4%, and Microsoft’s shares fell by 6%, despite both companies surpassing profit and revenue expectations for the July-September quarter. Amazon's shares declined by 3.4% initially, but gained in after-hours trading following better-than-expected third-quarter results.

"The costs of running AI technology are significant, and acquiring capacity is expensive," noted GlobalData analyst Beatriz Valle. "There's an intense competition among major tech firms to enhance their capabilities, and it will take time to realize returns and achieve widespread technology adoption."

On Thursday, Amazon projected that its capital expenditures would remain high in the foreseeable future to support AI software development. CEO Andy Jassy referred to AI as a "maybe once-in-a-lifetime type of opportunity" during an analyst call.

Amazon’s capital expenditures are expected to reach approximately $75 billion this year, compared to $48.4 billion last year, with even higher figures anticipated for 2025. According to Visible Alpha, Microsoft’s quarterly capital spending now exceeds what it used to spend annually before fiscal 2020. Similarly, Meta’s quarterly expenses are now on par with its total annual expenditures until 2017.

Microsoft reported a 5.3% increase in capital spending to $20 billion for its first fiscal quarter, forecasting further AI-related spending increases in the second quarter. However, the company warned of potential slowdowns in growth within its key cloud division, Azure, citing capacity constraints at its data centers.

Gil Luria, head of technology research at D.A. Davidson, commented, "What investors might be overlooking is that every year Microsoft overinvests—like they are this year—creates a drag of a whole percentage point on margins for the next six years."

Meta also cautioned about a "significant acceleration" in infrastructure expenses related to artificial intelligence in the coming year.

CAPACITY CONSTRAINTS HINDER GROWTH

Capacity limitations are impacting the entire tech sector. Chip manufacturers, particularly AI leader Nvidia (NASDAQ: NVDA), are struggling to keep up with demand, complicating efforts for cloud providers to expand their infrastructure.

Advanced Micro Devices (NASDAQ: AMD), which reported results earlier this week, indicated that demand for AI chips is rising much more quickly than supply, constraining its ability to capitalize on this surge in orders. The company warned of tight AI chip supply heading into next year.

Despite these concerns, Meta and Microsoft emphasized that it is still early in the AI development cycle and highlighted the long-term promise of the technology. Their investments echo the period when Big Tech was establishing cloud services and waiting for market acceptance.

"Building out the infrastructure might not be what investors want to hear in the short term, but the opportunities here are substantial," stated Meta CEO Mark Zuckerberg during Wednesday’s earnings call. "We will continue to invest significantly in this area."